Universidad Technologica de Bolivar's Ignacio Velez-Pareja and University of the Andes' Patricia Rojas: "Some Evidence on Financial Distress Costs and Their Effect on Cash Flows." (Abstract ID: 939731)

Carey Street is perhaps most famous for the bankruptcy court also resident. It moved here from Westminster in the 1840s due to the escalating number of common law judges. It is because of this connection with bankruptcy that the street is known to wags as Queer Street, an approximate nadir to the familiar zenith of 'Easy Street'. Here 'queer' is being used as a reference to an antiquated slang meaning of the word of 'in financial straits'. The jury is still out on how queer might have come to mean this, suggestions include that it is a slurred corruption of Carey Street, another that it is a metaphoric reference to a crooked shape, more convincing is that it is a transmutation of the German Querstrasse (street running off at a right angle). These days you won't hear people asking directions to Queer Street, it is many a year since anyone actually called Carey Street Queer Street but the allusion captured public conscience and in casinos, racecourses and poker dens being in Queer Street is still a popular, jokey euphemism for a losing punt.

Carey Street is intrinsically linked to the legal profession and in the past famous people have lived or worked here. Henry Mayhew, founder of Punch, started out as errand boy in his father's legal practice 'very little to the satisfaction of any of the parties concerned'. The bankruptcy division is in the Thomas More building to the North of the main High Court building and the Statue of Sir Thomas More adorns the elbow of Carey Street and commemorates this remarkable man....

An echo of the everyday bustle of Carey street is offered by Charles Dickens in his chronicles of the seedy underbelly of Victorian London. Bleak House and The Pickwick Papers are set in the environs of Carey Street In Pickwick Papers Dicken's offers this description of the bankruptcy court: 'In a lofty room, badly lighted and worse ventilated there sit one, two, three or four gentlemen in wigs with little writing desks before them; a box of barristers on their right hand; an enclosure of insolvent debtors on their left; and an inclined plane of the most especially dirty faces in their front. These gentlemen are the commissioners of the Insolvent Court and the place in which they sit is the Insolvent Court itself."

This paper compares parametric, semi-parametric and non-parametric methods in prediction of bankruptcy. Special care is devoted to the effect of choice-based sampling. The choice of the sampling and estimation method lead to a similar trade off. Using choice-based sampling and logit model leads to minimization of risk exposure. Samples unbalanced across groups and Klein and Spady (1993) semi-parametric method allow for better overall prediction accuracy and thus profit maximization. Both the choice of sampling method and the choice of estimation method should be thus made conditional on an explicit objective function of the financial institution in assessing credit risk.

This article discusses comparative consumer bankruptcy in the context of the international spread of consumer credit capitalism and its accompanying social cost, overindebtedness. The article outlines the contours of regulation of credit markets and overindebtedness within Europe, the influence of the U.S. idea of the “fresh start” on recent changes in European debt-adjustment laws and continuing contrasts with the U.S. approach to bankruptcy. As consumer debt increases in Europe and elsewhere, these differences between continental European and North American approaches to bankruptcy might be explained by the path-dependence of legal institutions, cultural differences, or the political influence of interest groups. The article is skeptical about cultural explanations of difference and suggests the value of an analysis that is sensitive to political economy and history. It also argues that future comparative research should focus on overindebtedness rather than bankruptcy.

Failure rates are estimated from a sample of new technology-based firms established in 1997/98 and evaluated by professionals as being feasible ventures, recommendable for early financing. It is found that, as of 1993/94, nearly 70% of the firms had failed and that several of the sustaining firms were in poor shape. It is concluded that the rate of survival is not significantly lower for these firms than for the new tech enterprises that have not been screened at early stages. Reasons for failure are discuss by reference to a number of case analyses. Typically it is found that a combination of factors interact to cause failure, that the chances for firm survival, at an early stage of development, could be characterized as a stochastic process, and that technology-based strategic planning is essential for success.

We present insolvency practitioners from 88 countries with an identical case of a hotel about to default on its debt, and ask them to describe in detail how debt enforcement against this hotel will proceed in their countries. We use the data on time, cost, and the likely disposition of the assets (preservation as a going concern versus piecemeal sale) to construct a measure of the efficiency of debt enforcement in each country. We identify several characteristics of debt enforcement procedures, such as the structure of appeals and availability of floating charge finance, that influence efficiency. Our measure of efficiency of debt enforcement is strongly correlated with per capita income and legal origin and predicts debt market development across countries. Interestingly, it is also highly correlated with measures of the quality of contract enforcement and public regulation obtained in other studies.

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Riz Mokal: "Contractarianism, Contractualism, and the Law of Corporate Insolvency." (Abstract ID: 946403):

We investigate how to extend bankruptcy rules to the general setting in which agents'' claims may refer to different issues. We show that the proportional rule is the only one whose extensions according to two natural procedures yield the same outcomes.

This paper proposes a matching model that distinguishes between job creation by existing firms and job creation by firm entrants. The paper argues that vacancy posting and job destruction on the extensive margin, i.e. from firms that enter and exit the labour market, represents a viable mechanism for understanding the cyclical properties of vacancies and unemployment. The model features both hiring freeze and bankruptcies, where the former represents a sudden shut down of vacancy posting at the firm level with labour downsizing governed by natural turnover. A bankrupt firm, conversely, shut down its vacancies and lay offs its stock of workers. Recent research in macroeconomics has shown that a calibration of the Mortensen and Pissarides matching model account for 10 percent of the cyclical variability of the vacancy unemployment ratio displayed by U.S. data. A calibration of the model that explicitly considers hiring freeze and bankruptcy can account for 20 to 35 percent of the variability displayed by the data.

"Coherent" measures of a bank's whole risk capital imply a structure of a bank's optimal credit portfolio that is independent of its deposits and the expected deposit rate, of expected bankruptcy costs and of expected costs of regulatory capital.

This article contains a relatively comprehensive review of current Czech law of security interests. Starting from a basis of socialist law of security interests, utterly useless in a market economy, the Czech legislator must be credited with having made some progress since 1989. However, that progress has been moderate at best. While Czech law of security interests contains some particular features conducive to taking security over business assets (such as a register of movables allowing the creditors to take non-possessory charges over chattels), confusion prevails about some of the most fundamental principles of this field of law, in particular the rules of priority. As will be shown in the article, these fundamental confusions and conceptual misunderstandings appear time and again in dubious and unclear statutory provisions that reduce legal certainty and increase transaction costs in the Czech credit market.

In part 1, the article first defines its scope. Part 2 briefly discusses the economic theories of secured credit. Part 3 reviews what could be called the general principles of the law of security interests, including in particular the rules on priority. Part 4 briefly mentions consumer protection issues. Part 5 contains a discussion of the most typical assets taken as security, the ways these assets may be charged and the way the charges may be enforced. Part 5 concludes with some recommendations for legal reform.

Using data on defaulted firms in the United States over the period 1982 to 1999, we show that creditors of defaulted firms recover significantly lower amounts in present-value terms when the industry of defaulted firms is in distress. We investigate whether this is purely an economic-downturn effect or also a fire-sales effect along the lines of Shleifer and Vishny (1992). We find the fire-sales effect to be also at work: Creditors recover less if the industry is in distress and non-defaulted firms in the industry are illiquid, particularly if the industry is characterized by assets that are specific, that is, not easily redeployable by other industries, and if the debt is collateralized by such specific assets. The interaction effect of industry-level distress and asset-specificity is strongest for senior unsecured creditors, is economically significant, and robust to contract-specific, firm-specific, macroeconomic, and bond-market supply effects. We also document that defaulted firms in distressed industries are more likely to emerge as restructured firms than to be acquired or liquidated, and spend longer in bankruptcy.

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Ignacio Velez-Pareja and University of the Andes' Patricia Rojas: "Some Evidence on Financial Distress Costs and Their Effect on Cash Flows." (Abstract ID: 939731):

In this work we explore the effect of book value leverage upon some financial indexes, such as real growth, payment terms from suppliers and gross and operating margins. We explore if there is statistical evidence on the influence of the book value leverage level in the financial distress or bankruptcy costs that appear as measured by the worsening of those indexes. Four dependent variables were explored: gross margin, operating margin, real growth in sales and payment terms from suppliers. In order to estimate the financial distress and bankruptcy costs associated with each dependent variable, logarithmic and semi-logarithmic models were constructed using data panel. We used a balanced sample composed by 644 firms from the commercial Colombian industry, provided by the Superintendence of Societies of Colombia. We also examined an unbalanced sample of 683 firms with Ordinary Least Squares (OLS) analysis. We found that there exists a relationship between book value leverage perceived by the market and gross margin. This allows us to explore the possibility to introduce the financial distress costs in the cash flows. The aim of the study is to explore a model that allows the analyst to include this effect in the forecasted financial statements. When this effect is included in the financial statements the free cash flows will be affected and hence the interaction of cash flows, cost of capital (weighted average cost of capital) and firm value calculated with the cash flows will eventually allow determining an optimal capital structure.

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